Introduction to insurance coverage for employment practice claims

Depending on the types of allegations that are made in an employment discrimination claim, there may be other insurance coverage forms other than the Employment Practices Liability (“EPL”) policy that may provide insurance benefits for an employer or its employees.

Employers often believe that Commercial General Liability (“CGL”), Directors and Officers (“D&O”), Workers’ Compensation, and other types of insurance cover employment practices claims. This is usually the wrong assumption to make. These policies are often written on an “occurrence” basis—that means that they’re meant to insure any harm or damage that occurred during the policy period. This “occurrence” requirement raises the issue of whether an employment-related injury can be pin-pointed to an event or series of events that occurred within the period of time that’s covered by the insurance.

Additionally, CGL policies are not adequate to cover employment-related suits because these policies require that losses arise out of an unintended, unpredictable, or accidental event. This is a problem because employment-related incidents often do not occur accidentally; they happen intentionally. CGL policies also only cover bodily injury; they typically do not cover humiliation and mental damage, which are commonly alleged in employment practice cases. As a result, employment practices liability claims are usually excluded from CGL insurance coverage. Most importantly, many CGL policies now have a specific “Employment Related Practices Exclusion” provision for claims “arising out of” or “in the course of” employment.

D&O insurance policies do not protect against many workplace claims, either. Inappropriate conduct (such as sexual harassment) typically is not within the scope of a D&O policy’s insuring agreement. D&O policies usually insure against wrongful conduct arising out of a company director’s or officer’s acts taken within his or her capacity as a director or officer. In harassment cases, the insurance company will argue that the employer is not protected by insurance because the wrongful conduct does not fit under these criteria. Perhaps most important is the fact that even if an individual is protected by a D&O policy, the company employer is not protected itself; “entity coverage” is typically limited to securities claims.

Workers’ Compensation insurance policies generally treat work-related claims as “bodily injury” and may not address non-physical aspects such as humiliation and emotional distress. Workers’ Compensation coverage relates specifically to the state’s statutory requirements for Workers’ Compensation, which excludes most employment practices liability claims.

The bottom line is that insurers will often bring up “coverage” issues when they are presented with employment-related claims on non-EPL insurance policies. At best, an employer may have to first make a decision on what kind of coverage to purchase before it addresses whether the actual employment-related claim has any merit/chance of sticking.

Types of policies that may provide coverage for employment practices claims:

Among the types of policies that may provide insurance coverage for employment practices claims are:

1) Commercial General Liability (“CGL”) Insurance;
2) Directors and Officers Liability (“D&O”) Insurance;
3) Employers’ Liability Insurance;
4) Employment Benefits Liability (“EBL”) Insurance;
5) Homeowners Liability Insurance;
6) Professional Liability or Errors and Omissions (“E&O”) Insurance; and
7) Workers’ Compensation Insurance.

a. There are many varieties of insurance policies that may provide coverage.

The good news is that there are many different kinds of potential insurance coverage when employment claims are asserted against an employer. One or more of the above policies may be enough to give an insured employer a valid defense against employment practices claims.

The bad news is that many employment practices claims involve intentional (as opposed to accidental or unintended) misconduct. Many jurisdictions prohibit indemnification for intentional torts, so this limits what the employer can raise as a defense in employment practices claims. These jurisdictions generally allow the insurance company to provide a defense for the defendant-employer only if the alleged intentional tort at issue in the claim is specifically mentioned in the insurance policy.

You should pay particular attention to the EPL insurance policy, since this is the policy form that contains the most thorough listing of employment torts that fall within insurance coverage. However, you should also be aware of all other sources of coverage, as well as any limitations that are in the available coverage forms.

b. There may be excess or umbrella insurance coverage as well.

In addition to the varieties of policies that may provide insurance coverage for some aspect of an employment claim, the employer might have excess or umbrella coverages (as opposed to primary coverage) available.

A pure excess policy increases the available limits of coverage beyond the primary coverage limits and follows the form of the main insurance policy contract (that is, the terms and conditions in the underlying policy apply to the excess coverage as well). As a result, there is an increase in the available insurance limits. The excess policy goes into effect once all the primary policies are already exhausted.

An umbrella policy also provides additional protection over one or more primary policies, but it’s different from an excess policy because it often provides extra coverage on the primary policy by filling up any existing gaps in the underlying coverage. Depending on the umbrella policy’s terms, there may be additional coverage that is not already provided by the employer’s primary coverages.

c. Each type of insurance policy is available on a primary or first layer basis.

Each of the types of coverage listed above is available on a primary or first layer basis. These policies provide immediate coverage after successful payment on the insurance policy for the covered losses.

The insurer that issued a primary policy has the duty to initially provide the defendant-employer with a defense and indemnity (that is, the insurance company’s guarantee to repay the employer for loss or damage that the employer had to pay). The only exceptions to this requirement are the terms and conditions of the insurance policy or applicable laws prohibiting the insurance company from providing that kind of coverage.